Thank you Charles. You don’t know how lucky you are to have the kind of local elected leadership you have in Harris County, and Charles Bacarisse is a prime example.
He is a citizen-servant in every sense of the word, and I am glad to call him my friend.
It is a great honor to appear before the Houston Club and the Houston Lyceum, and to do so one day after announcing a school finance and property tax relief plan that can change Texas for years to come.
And today you get two for the price of one, because I have asked former comptroller John Sharp, who chaired the Texas Tax Reform Commission at my request, to join me and share a few thoughts as well on this important issue.
Let me say something about John and I working together to reform school finance in Texas.
Many of you know we go back many years, in fact, to 1968 when we met as freshmen classmates in Squadron 6 of the Fightin’ Texas Aggie Corps of Cadets.
Of course, 30 years later we were campaigning against one another.
He said a lot of nice things about me back then, and I have since forgiven him.
And then some time last year we got tired of putting our friendship on hold and starting talking again.
And today we are working together to solve our most complex challenge as a state: reforming school finance.
If John and I can work together, there is hope yet for the Israelis and Palestinians.
John was gracious enough to serve as chairman of the Texas Tax Reform Commission, a bipartisan group of visionary Texans who yesterday morning offered their plan to reform school finance and cut property taxes in Texas.
They dealt with a difficult challenge, and one day after their first hearing, they were dealt a hard deadline of June 1st by the Texas Supreme Court.
The court ruled we have an unconstitutional statewide property tax because local school districts lack meaningful discretion over the revenue they can raise to fund our schools.
In addition to that that constitutional challenge, Texans have seen their property taxes go through the roof, the state share of education funding decline to 36 percent today, and a franchise tax intended to help fund our schools become a voluntary offering paid only by those with generous hearts or bad CPAs.
Yesterday the tax reform commission unveiled a plan that provides Texans four principal benefits.
First, it is a fundamentally fairer way to fund education because its centerpiece, a reformed franchise tax, is broader, fairer and assessed at a lower rate than the tax we have today.
It closes tax loopholes so many more will pay their share, and some will pay less than they pay today.
Second, this plan encourages employers to invest in people.
For the first time in memory, employers will have new incentives to create jobs and invest in worker pensions, worker healthcare and employee dependent care.
Third, this plan makes homeownership more affordable for millions of Texas families by slashing school property taxes by about one-third by the 2007 tax year.
And fourth, this plan dramatically increases the state share of education funding.
By Fiscal Year 2008, the state will pick up an estimated 50 percent of the cost of public education, instead of only 34%, which the current system is leading us toward in Fiscal Year 2007.
Here’s how it works.
We are proposing a revised franchise tax that captures more of the economy.
Today only one in sixteen businesses pays the franchise tax.
By including more businesses, and by changing how the franchise tax is calculated, we can lower the rate.
Instead of a franchise tax based on 4.5 percent of net income, businesses will add up their total revenues and either deduct the cost of goods sold, or the cost of employee compensation, with the remaining revenue subject to a tax of one percent.
Those in retail or wholesale, who have a lower profit margin, will be taxed at half a percent.
The net effect is a broader tax structure that is fairer, and that provides a long-term, stable source of revenue for schools.
Every time you hire someone your tax liability will go down.
Every time you invest in their health insurance or workers’ compensation, your tax will go down.
And every time you invest in worker pensions, your tax will go down.
And to protect our smallest businesses, we are proposing doubling the small business exemption from $150,000 to $300,000 and indexing it to inflation.
Furthermore, sole proprietors and general partnerships owned by natural persons will remain exempt.
In addition, we’re proposing raising the cigarette tax a dollar per pack, which makes sense if you consider the billions of dollars taxpayers spend to treat tobacco-related illnesses each year.
And every dollar raised by the cigarette tax and the reformed franchise tax will help us cut your school property taxes by about 33 percent.
If your home is valued at $150,000, and your school district sets its rate at $1.50 per every $100 of assessed value, you will save nearly $700 on your annual property tax bill starting in 2007.
And because we have restrained spending and refused to raise taxes when we faced a $10 billion budget shortfall in 2003, we now have a revenue surplus in excess of $4 billion.
Using surplus dollars, as well as the cigarette tax and the reformed franchise tax, we will be able to deliver to the people of Texas a net tax cut of nearly one and a half billion dollars in 2007.
Because we don’t believe any business should face the hardship of a changing tax structure in the middle of a tax year, we are proposing a tax cut of 17 cents per every $100 of assessed value in this tax year, to be followed by the full reduction the next year.
To my Democrat friends who wanted to see a tax bill without a hike in the sales tax, I say here is your plan.
To my Republican friends who said we need a substantial property tax cut of at least 50 cents, I say here is your plan.
And to members of both parties who said we needed a broader, fairer business tax, I say here is our plan.
We can broaden the base of the franchise tax and lower the rate while ensuring schools have additional funding capacity.
We can protect jobs and encourage employers to invest in their workers’ healthcare and pensions.
We can provide a record $6 billion in property tax relief and give Texans a net tax cut of nearly $1.5 billion by the 2007 Tax Year.
And we can provide property tax relief and real tax reform to address the needs of our future.
Some might find it tempting to spend the entire $4.3 billion surplus on property tax relief and save the hard work of tax reform for another day.
That’s tempting until the bill comes due.
Some of you might remember a character from Popeye named Wimpy. Wimpy was fond of saying: “I’ll gladly pay you Tuesday for a hamburger today.”
Legislators should avoid this approach to tax reform, which is to cut property taxes today and worry about paying for it tomorrow.
Unless legislators pass tax reform to go along with a major property tax cut, they will dig themselves a multi-billion dollar budgetary hole that would surely lead to a permanent tax hike next year.
There is a better way.
For years Texas has needed a new tax structure that protects jobs, reflects the modern economy, broadens the tax burden, and lightens the load of property owners.
Now we have that plan.
It is a responsible proposal that appeals to Texans’ sense of fairness, encourages investments in jobs and workers, discourages harmful addictions like smoking, and utilizes a portion of the surplus to give the people a well-deserved tax cut without leaving future legislatures a mountain of debt.
Just as it took a bipartisan commission to recommend this tax reform plan, I am looking for bipartisan support to pass it.
We have discussed this plan with more than one hundred members of the House and Senate in more than two dozen meetings.
We have met with business and labor leaders, taxpayer watchdogs groups and education leaders.
We are reaching out to build bipartisan consensus for a plan that has bipartisan appeal.
What this commission has proposed is fair, forward-looking and future-oriented.
It creates a tax structure for a 21st century economy.
And it provides tax relief to those who need it most.
On top of that, when you take smokers out of the equation, it provides a net tax cut to every income bracket in Texas.
When was the last time you heard about a tax reform bill, or a tax cut bill, that benefited everybody so the interest groups couldn’t try to pit the rich against the poor or the middle class?
It’s a plan that works for everyone income level, and Texans of all walks of life.
This is our great chance, a once in a generation opportunity to lay aside politics in pursuit of shared prosperity.
I ask legislators of both parties to join me in that pursuit.
And I ask for your support too because nothing as difficult and complicated as school finance passes the legislature until the people weigh in.
If legislators meet the mandate of the court in a timely manner, we can then turn to other critical concerns, such as teacher pay, educational excellence and financial accountability for the classroom.
But let us start where our work must begin: by reforming our tax system and building a new path to a future of prosperity.
I ask for your help in meeting that goal. Thank you. God bless you. And God bless Texas.
Please join me in welcoming the chairman of the Texas Tax Reform Commission who has worked tirelessly to craft a tax proposal that is good for Texas: John Sharp.
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